9 Tips to Scale Back Student Loan Payments

Oct. 26, 2011— -- President Obama announced his plan to help borrowers inundated with student loan debt today, which coincided with the release of a new report from the College Board that showed how higher education had become even more expensive.

The College Board found that the average in-state tuition and fees at four-year public colleges rose 8.3 percent this year. Tuition rose more than 4 percent at private colleges -- all at a time when student borrowers and college grads struggle to keep up with payments in a weak economy that holds even weaker job prospects.

The president's plan includes capping federal loan payments at 10 percent of borrowers' discretionary income -- that limit is set at 15 percent now -- making loans forgivable after 20 years instead of 25, and provides the opportunity to reduce some federal loan interest payments. The administration said it would give students the opportunity to consolidate their Federal Family Education Loans with their Direct Loans and reduce the interest rate for those who do that by half a percent.

Read More About the President's Plan Here

The president said the plan could help up to 6 million borrowers -- which is just a fraction of the 36 million saddled with student loans across the country. Here are some tips from several industry watchdogs, including Lauren Asher, president of the Institute for College Access and Success and its project on student debt, to help you navigate the best solution:

1. Know Your Loan: There is a huge difference between federal and private student loans. Federal loans, according to Asher, offer a lot of options for staying out of default and keeping payments manageable, while private loans can leave borrowers at the mercy of their lenders.

"They don't come with the repayment plans, forgiveness options and other things that come guaranteed with federal student loans," she said.

Those not sure about what kind of loan they have can visit www.nslds.ed.gov to view the loan amounts, lenders and repayment status for all the federal loans. If a loan isn't listed, it's probably private.

2. Know Your Grace Period: All loans have varying grace periods. It's six months for federal Stafford and federal Family Education loans, nine months for federal Perkins loans, depending on when they were issued, according to the Project on Student Debt. It's also extremely important not to miss the first payment.

3. Tax Deduction: All borrowers should take advantage of the student loan interest tax deduction, an above-the-line exclusion on a federal tax return of up to $2,500 in student loan interest. You can claim the deduction even if you don't itemize your taxes.

4. Take Advantage of Automated Payments: Many lenders offer a small reduction in interest rates if borrowers sign up for automatic monthly payments.

There are also several options for many people who borrow, specifically with government loans. While many look for a long-term fix for bringing down the balance of their loans, the government, and some private lenders, offer short-term solutions to lower monthly payments.

5. Consolidation: Consolidating is similar to refinancing a loan, and allows borrowers to combine several (or one) loan into one payment -- the interest rate is an average of the interest rates on all the loans. Consolidating will usually lower the monthly payment but isn't always a great idea, as it often extends the life of the loan and can result in more interest paid throughout its life. If you are close to paying your loans off -- you may want to steer clear.

6. Extended Repayment: Government loans allow some borrowers to extend the repayment period of their loans beyond 10 years, which can lower monthly payments. The down side? Extending your repayment terms can lead to paying much more interest over the years.

7. Income-Based Repayment: The Income-Based Repayment plan caps borrowers' monthly payments at 15 percent of their discretionary income, taking into account the borrower's income and family size. Monthly payments are adjusted annually according to any changes in those figures. The government then forgives any outstanding debt on the plan after 25 years.

While the president's new plan focuses on changes to this plan -- one that could potentially help 6 million borrowers -- not many take advantage of it. According to recent figures, less than 450,000 people were enrolled in the program at the end of August.

8. Deferment: "There's an unemployment deferment for federal student loans, there's economic deferment and forbearances. These are all useful for short-term debt management. But on some loans, your interest will continue to accrue," Asher said. Deferring on your loans means you can postpone making payments, but you are eligible only if you haven't defaulted. Deferment is not an option with private loans.

9. Forbearance: There are positives and negatives to this option. The positive? You can temporarily postpone your loan payments. The negative? Interest on that loan will continue to accrue. On federal loans, the option is available for 12-month intervals for a period up to three years. Private lenders generally only offer it for one year, and they can charge fees, like popular lender Sallie Mae, in some cases.